Question

Karl inc. has an opportunity to expand one of its production facilities at a cost of $425000. If the expansion is undertaken Karl inc. expects their income will increase by $102000 the first year and then increase by $6000 each year after that. The annual expenses are expected to be $10000 the first year and increase by $1500 each year after that. The company will depreciate the equipment using a 5 year MACRS (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.75%) the expected market value at the end of 8 years is $90000 and the tax rate is 34%. What is the IRR of the BTCF? Ans. XX.X%

What is the present worth of the after tax cash flow if MARR =15%? Ans. $xxxx

Answer 1

Year	Cashflow
0	$     (425,000)
1	$          89,620
2	$        109,930
3	$          94,404
4	$          86,276
5	$          89,246
6	$          83,879
7	$          78,540
8	$        140,910
IRR	15.26%

	Year	1	2	3	4	5	6	7	8
a	Income	$        102,000	$        108,000	$        114,000	$        120,000	$        126,000	$        132,000	$                 138,000	$        144,000
b	Expesnes	$          10,000	$          11,500	$          13,000	$          14,500	$          16,000	$          17,500	$                    19,000	$          20,500
c	Net Cashflow(a-b)	$          92,000	$          96,500	$        101,000	$        105,500	$        110,000	$        114,500	$                 119,000	$        123,500
d	Tax (c*34%)	$          31,280	$          32,810	$          34,340	$          35,870	$          37,400	$          38,930	$                    40,460	$          41,990
e	Net Cashflow after Tax(c-d)	$          60,720	$          63,690	$          66,660	$          69,630	$          72,600	$          75,570	$                    78,540	$          81,510
f	Salvage Value								$          90,000
g	Tax on Salavge Value(90000*34%)								$        (30,600)
h	Depreciation	$          85,000	$        136,000	$          81,600	$          48,960	$          48,960	$          24,438
i	Tax Shield on Depreciation(h*34%)	$          28,900	$          46,240	$          27,744	$          16,646	$          16,646	$            8,309	$                             -	$                   -
j	Total Cachflow(e+f+g+i)	$          89,620	$        109,930	$          94,404	$          86,276	$          89,246	$          83,879	$                    78,540	$        140,910

Year	Cashflow	PV Factor @15%	Present Value
1	$          89,620	0.86957	$                77,931
2	$        109,930	0.75614	$                83,122
3	$          94,404	0.65752	$                62,073
4	$          86,276	0.57175	$                49,329
5	$          89,246	0.49718	$                44,372
6	$          83,879	0.43233	$                36,263
7	$          78,540	0.37594	$                29,526
8	$        140,910	0.3269	$                46,063
Present value of Cashflows			$             428,679
Initial Investment			$             425,000
Net present Value			$                  3,679

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